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| Thought Leaders: Family Office |
Ties That Bind
Myra Salzer
05/01/2007
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Forming a family office holds
great appeal for many wealth creators: Pooling family funds creates a structure
that can take care of generations of the wealth creator’s progeny. It offers a
network of services to provide for a family’s every need over the course of many
years. Those who earn family wealth may feel such an organization is in
everyone’s best interest. But, in reality, family offices can rob many third-,
fourth- and fifth-generation inheritors of their individuality and
independence.
It seems that the larger a family office becomes over time, the
more help it offers. In-house accountants, lawyers and employees take care of
the family business, file family members’ tax returns, fill trustee
positions, draft the prenuptial agreements, vote the proxies, plan the estates
(using carefully selected outside law firms), schedule the jets, write the
checks, buy the homes and vacation residences, lease the cars and handle the
divorce settlements.
Freedom from the business of personal responsibility may
sound appealing, but it comes at a steep cost. |
While freedom from the business of personal responsibility may
sound appealing, it comes at a steep cost. When the family office files a family
member’s tax return, for example, the individual (and often his or her spouse)
loses both autonomy and privacy. The family office must report medical
expenses, and consequently finds out when a family member sees a psychiatrist or
undergoes fertility treatments. Likewise, an individual’s spouse may not want
anyone to know his or her earnings, but they must report this information as
well.
One client I work with inherited wealth managed by a family
office. In her early 20s, she decided to become self-supporting and worked
several jobs to make ends meet, including waiting tables and giving ski lessons.
When she received her W2s, she reported her own income and filed her own tax
return. A few months later, she received an angry call from the head of the
family office. Naturally, the family office also filed a return, and because she
filed independently, the IRS received two. "What a mess you made for the family
office!" the executive told her. I cannot imagine that the original wealth
creator and founder of this family office intended to deny her the experience of
taking responsibility, but that is exactly what happened.
One must wonder how the family office will view the
great granddaughter who moves to Italy or the great-great-grandson who wants to
embark on a new business venture, and by doing so, puts the family wealth at
risk. Will the office treat each member independently and fairly—or will some
members feel forced to leave its confines? For one heir who decided to leave his
family office, it cost him everything—including his family, with whom he has had
no contact since he left. The remaining family members, several of whom attended
a workshop I held on inherited wealth, have no idea what happened to him and are
afraid to find out—and more afraid to test their own independence.
Family offices can require those they serve to attend numerous,
time-consuming events, such as shareholder meetings or foundation board
meetings. These gatherings usually take place during working hours and can
require travel when the inheritor does not live in the same city. As a result,
many inheritors pursue occupations that can accommodate the office’s
schedule—rather than career paths they would really like to follow.
By the third generation, these offices frequently become
self-sustaining entities disconnected from the family members. Somehow, in that
third generation, the goal of meeting the family’s needs, serving the members
and providing a forum where everyone is encouraged to develop and flourish often
becomes secondary to the goal of growing the office.
There is nothing wrong with the idea of a family office. The
founder’s intentions are usually earnest, but I wonder if they are, dare I say,
ego-driven. It takes a confident person to build an empire only to risk having
his family whittle it away over time. Before creating a legal structure that
will impact the lives of future generations, wealth creators must examine their
own motives and goals. More importantly, they must use their wealth to empower
their descendents, rather than stifle them. Sometimes the greatest help anyone
can give is the permission to learn and grow independently.
Myra Salzer is the founder of the Wealth Conservancy in Boulder,
Colo., and the author of The
Inheritor’s Sherpa: A Life-Summiting Guide for Inheritors.
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